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Alex is assessing the price of Fortis
Alex is assessing the price of Fortis. She expects Fortis to growth dividends at its historical rate of 4.5% per year over the next three years, and following that, she expects the dividend growth rate to steady to the industry average of 2%. If Fortis shareholders expect a return on equity of 8% per year and the annual dividend paid exactly one year ago was $4.75, what is Alex's per share estimate of Fortis' equity value? If the shares are currently trading for $97.05 per share, should Alex buy, sell, or hold the share?
Expert Solution
ALEX PER SHARE ESTIMATE SUED BE 86.5
| year | expected dividend | PVF@8% | PV OF DIVIDEND | |
| 1 | 4.75x1.045 | 4.964 | 0.926 | 4.596 |
| 2 | 4.964x1.045 | 5.187 | 0.857 | 4.447 |
| 3 | 5.187x1.045 | 5.421 | 0.794 | 4.303 |
| 13.346 | ||||
| price of share at the end of year (P3)= | d2 x (1+g) | |||
| ke- g | ||||
| = | 92.149 | |||
| present value of share = | PV of P3 + PV of dividends | |||
| = | P1 x PVF@8% + PV of dividends | |||
| = | 86.497 |
ALEX SHOULD SELL THE SHARE AS THE MAKET PRICE IS HIGHER THAN THE INTRINSIC VALUE OF SHARE.
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